The Astonishing $600 Trillion Interest-Rate Derivatives Market

A post from April 21, 2010 on Washington’s Blog calls derivatives “the world’s largest market, dwarfing the size of the bond market and world’s real economy” and says that the derivatives market “is currently at around $600 trillion or so (in gross nominal value).” — See “Are Interest Rate Derivatives a Ticking Time Bomb?

In contrast, Washington says that the worldwide bond market in 2009 was $82.2 trillion and the world economy was $58.07 trillion.

The most popular derivative, he says, are interest rate derivatives, in which “the underlying asset is the right to pay or receive a notional amount of money at a given interest rate,” according to the Wikipedia definition of interest rate derivative.

Washington quotes various economists to demonstrate why such derivatives have the potential to seriously destabilize the world economy (which we all know is so solid right now). He includes a long quote from portfolio manager Doug Noland, who compares interest rate derivatives with the so-called “portfolio insurance” that played a role in the stock-market crash of 1987.

One proponent of portfolio insurance is cited as making this breathtaking statement in 1985:

[I]t doesn’t matter that formal insurance policies are not available. The mathematics of finance provide the answer…The bottom line is that financial catastrophes can be avoided at a relatively insignificant cost.

About interest rate derivatives,Washington believes:

[N]o one – even the people that design, sell or write about the various interest rate derivatives – really knows how much of a danger they do or don’t pose to the overall economy. In addition to all of the other complexities of the instruments, the very size of the market is unprecedented.

AB — 22 April 2010

Defining Asset Bubbles

Here is an interesting interview with Jeremy Grantham of investment firm GMO, discussing asset bubbles, what they are, and how they should affect investment decisions.

Economist Edward Harrison at Naked Capitalism adds some analysis and explanation in his post “Jeremy Grantham on Bubbles.” Harrison’s “informal working definition of a bubble is “a price rise that is at least two standard deviations above trend.” He says that

Above two-standard deviations the psychology of prior price movements starts to dominate price activity and a bubble forms in which power law characteristics come into play.

In “power law” relationships, a quantity varies more than you should expect. It kind of refers to the “tall head” part of a distribution graph, the opposite of the “long tail.”

AB — 21 April 2010

The annoying thing about The Big Oligarchy

The annoying thing about The Big Oligarchy …

the banks

the insurance companies

the government

the giant firms

and their privileged controllers

… is that you pay into It all your life through premiums, taxes, and the money It makes from the float on your cash …

but then when you ask for the promised (or implied) benefits, It begrudges paying you and does Its best to stonewall.

AB — 26 March 2010

How Can Local Economies Transition to a Petroleum-Scarce World?

Today I read an interview in New Scientist with Rob Hopkins, a key figure in the Transition Towns movement — see “Rob Hopkins: Getting over oil, one town at a time.” He writes about how communities can transition to a more sustainable economy at Transition Culture.

Hopkins describes the Transition Towns concept as follows:

A Transition Town is formed when a group of individuals gets together to ask how their community can mitigate the effects of a potential reduction in oil and drastically reduce their carbon emissions to offset climate change. The scheme has become so successful we now have 250 official Transition Towns and Cities worldwide, with many more interested in becoming involved.

One of the strategies being used to help communities transition to a petroleum-scarce economy is EDAP (Energy Descent Action Plan). Here’s a Slideshare presentation that explains how this process is working for some communities:

AB — 7 February 2010

Disaster Housing: Solutions Conceived by the Hexayurt Project

Vinay Gupta of the Hexayurt Project has done much work in the area of emergency housing, something I have explored in some postings here at Bubbleconomics — see “MSF’s ‘Plug and Play Hospital’ in Haiti,” “Haiti Disaster: Housing for When the Bubble Pops,” and “Where will people live after the Big Bubble pops?

Gupta articulates the need for inexpensive, rapidly-deployable solutions for housing in emergencies in his article “Hexayurt Country.”

In an infographic called “Six Ways to Die,” he sketches out a map of the infrastructures that keep us all alive and illustrates how lives are threatened when those infrastructures fail or are disrupted.

Built around that “Six Ways to Die” framework is a presentation called “Dealing in Security: Understanding Vital Services and How They Keep You Safe.”

The Hexayurt is a sheltering solution made from flat panels that can be quickly and cheaply constructed but are much more durable than emergency tents. Here is a very useful video, “Ending Poverty With Open Hardware,” in which Gupta explains some important concepts about how to prevent loss of life using open technology.

AB — 23 January 2010

MSF’s ‘Plug and Play Hospital’ in Haiti

Yesterday I was discussing the potential value of rapidly-deployable emergency housing in disasters — see “Haiti Disaster: Housing for When the Bubble Pops.”

Today, BoingBoing published a fascinating interview with Laurent Dedieu, logistics supervisor for Medecins Sans Frontieres (MSF, aka Doctors Without Borders), about the inflatable hospital the organization has deployed in Haiti. (See “Haiti: HOWTO set up a plug-and-play hospital — Doctors Without Borders.”)

Just the fact that MSF has a job title “Logistics Supervisor” makes a statement about the character of the organization and the way it thinks about relief work. The group also has an R&D organization, which has developed the “plug and play hospital,” described by BoingBoing as “a series of inflatable tents with generators and sanitation equipment designed to be mostly independent from the water and power systems typically unavailable after a catastrophe.”

Follow this link for a gallery of photos showing how the hospital was set up.

In the interview, Dedieu describes the hospital:

The mobile field hospital is 9 tents, and each is about 100 square meters, so the total is about 900 square meters. The land we’re using is a former football field, so it’s the perfect space for this, nice and flat.

[The hospital consists of the] 9 tents, 100 beds, including hospitalization and ICU and recovery beds. A triage and emergency tent, and two operations theatres. The idea is that within the tent we have a complete kit we can deploy including energy supply, water supply, all the sanitation, and all medical equipment inside the tent. In Haiti, everything needed to run a hospital including beds and biomedical equipment is included.

We want to be as autonomous as possible with regard to energy. In this case we have one 30 KV generator and one 60 KV generator. Plus an electrical board, and equipment to ensure electrical safety. And then you have all the electrical wire you need to set up lights inside the ward, and set up plugs for the medical equipment.

Here he gives some insights into how MSF’s R&D and innovation processes work:

We are working with standard MSF equipment, we have R&D centers and storage in Europe, in Bordeaux and Brussels. When the equipment reaches the field, typically you have to face some technical issues, some small problems, but the big issues have been solved. One of the problems we had the first time we used this hospital in Pakistan in 2005 was that there was a big difference in temperature between day and night, at night the tents were deflating. The pressure inside the tent was not enough and was creating a problem. Now we have gauges that constantly measure the pressure and trigger compressors to re-inflate if it goes too low.

MSF’s solution speaks to the need for technologies that can be rapidly deployed in crisis situations to deal with medical needs. Previously I wrote out some thoughts about the need for solutions for post-bubble housing needs — see “Where will people live after the Big Bubble pops?” from June 2009 and “Haiti Disaster: Housing for When the Bubble Pops” from earlier this week, 20 January 2010.

What I’m trying to get at is that, if the Bubbleconomics premise is correct, then the world is going to see increasing needs for large-scale relief solutions, as the global situation worsens and economic bubbles pop at all levels. This emerging regime will call for innovative efforts on the parts of governments, NGOs, and businesses to create solutions that can be deployed rapidly at large scale to meet such needs as housing, medical care, and food.

AB — 21 January 2010

Haiti Disaster: Housing for When the Bubble Pops

Seeing the devastating effects on the lives of the people in Port au Prince, Haiti, in the wake of the recent earthquake emphasizes the potential value of emergency housing solutions for recovery.

In such a disaster, survivors are thrust into chaos and forced to live in unstable, unsanitary conditions, seeking out housing any way they can. It seems to me this suggests a need and opportunity for emergency housing solutions that can be quickly and massively deployed by governments or NGOs.

An article in Wired from October 2007 includes a gallery of interesting designs for such situations — see “Instant Housing and Designing for Disaster.”

Just having the housing technology, though, isn’t enough, as demonstrated by the difficulties of getting medical and food assistance to the people in Port au Prince. The problem isn’t necessarily getting relief resources in the first place, but in getting them implemented and distributed.

Deploying emergency housing for potentially hundreds of thousands of people would require a tremendous amount of advance expenditure and organizational infrastructure. So the solution that’s called for is more along the lines of an urban-planning project rather than just an architectural problem.

Suppose it were possible to manufacture in advance the components of a massive portable community that could be stored in advance and deployed rapidly anywhere in the world?

Just thinking out loud — see my previous article, “Where Will People Live After the Big Bubble Pops?

AB — 19 January 2010